Cultivate good habits

Many years ago, these "balanced" options were balanced between asset classes but they loaded up on shares when markets were booming to maximise returns, leaving investors exposed when markets turned ugly.

Researcher SuperRatings says the median-performing balanced option returned 7.5 per cent over the year to June 30. At more than four percentage points above inflation, that's good. But sharemarkets remain skittish.

Since April, the Australian sharemarket has fallen by more than 8 per cent and international shares are down about 5 per cent over the same time, SuperRatings says. With the ongoing concerns about the European sovereign debt crisis, investors are still risk-averse and staying away from shares. In the past five years to June 30 this year, the median-performing balanced investment option had an average annual return of just 2.2 per cent.

As our mostly privatised super system has not served us that well, it's worth considering whether a public system would have done any better. The Future Fund is probably the closest proxy to what we would have had if we had a public super system. The Future Fund was established to fund the pension liabilities of retired public servants.

The Future Fund has been going only since May 2006 but to March 31 this year (the latest available data), the average annual return was 5.3 per cent. That excludes the fund's Telstra holdings, which, if included, would lower the returns. Telstra shares are excluded from the Future Fund's performance because it was given Telstra shares by the government after the telco was privatised.

The five-year periods over which the performances of the Future Fund and balanced investment options are being lined up against each other do not match exactly but they are close. The Future Fund's average annual return of 5.3 per cent is more than twice the return of 2.2 per cent for the balanced options.

The Future Fund's return is particularly good given the five-year period includes the global financial crisis.

The asset allocation of the Future Fund is what most people would probably consider "balanced". Whereas most "balanced" investment options have about 70 per cent of the money invested in shares and property, the Future Fund has about 45 per cent in shares and property, with the rest in alternative assets, debt securities, cash, private equity and infrastructure.

It's worth remembering most fund members are free to choose any super fund they wish, including one that has a more conservative investments spread to the one they are likely to be in now.